There’s a marvelous scene in the 1984 movie, This Is Spinal Tap, in which guitarist Nigel Tufnel points out to an interviewer that he chooses Marshall amplifiers because, unlike most amplifiers (with volume knobs that go from one to ten), “These go to eleven… It’s one louder, innit?”
The interviewer tries to explain that they’re only numbers, stamped into plastic knobs and don’t represent actual decibels of sound in any way.
Nigel tries to take this information in for several seconds, but fails to understand the obvious logic. When his mind draws a blank, he reverts back to his previous statement and says, again, “These go to eleven.”
Poor Nigel. He’s made up his mind to believe a false premise, because the thought is so appealing.
We can all laugh at Nigel’s inability to understand that his amplifiers are actually no louder than other amplifiers, yet, when we see the same lack of logic in investment circles, we often regard it as not only normal, but correct.
Of course, investment philosophy can be made highly complex, or it can be disarmingly simple: what goes up, must come down. If we accept the validity of this comment, we might also reason that the higher the market goes, the harder it will fall when the bubble bursts, and, of course, the greater the damage it will do to investors when it does.
In the run-up to the 2008 market crash, I frequently suggested to friends and associates who were heavily invested in the market that a crash was on the horizon. In most cases, the reaction I received was, “All my investments are in high-return stocks. If I got out of them, I couldn’t live as well as I do.” “Yes,” I would reply, “but if you don’t get out in time, you’ll lose far more. Your loss will be equal to the depth of the retrenchment. Then, you’d have to live on far less than if you simply got out now.”
I’m sorry to say that the great majority of those with whom I spoke remained in the market… and lost a major portion of their wealth as a result. Worse, when they recovered (with much-diminished lifestyles) they went right back to high-return (and therefore high-risk) stocks. Ipso facto, they’re once again primed for another major loss with the next crash.
In each of the above cases, the investors pursued whatever investment would give them the greatest immediate return. Unfortunately, they put no further thought into their investments than that one short-sighted objective.
It should be mentioned that, back in 2007–2008, when the above discussions were taking place, the investors in question would say, “Everybody agrees that these stocks have a long way to go before there’s a correction. I’d be stupid if I didn’t cash in on that ride.”
By “everybody,” they meant their brokers and all the pundits from Wall Street who appeared on television news programmes—each of whom stood to gain from over-investment and malinvestment in the markets. Indeed, at the time, they all predicted that the market was “going to the moon.”
And this was not the first time that such a prediction occurred. In fact, such predictions have become the byword of every bull market. It’s for this reason that no bull market ends with a whimper, but with a major upside spike. Investors dive in most heavily in the final days of a major bull market.
When warned of a crash, investors generally say, “I’ll wait until I see the turn downward, then I’ll get out.” But, in fact, there’s no “aha moment” to signal them to exit the market. Quite the contrary. If the market does take a sharp dip, the brokers and television pundits describe the drop as a correction and advise investors to “buy on the dip.”
If we consider all the above, it’s no wonder that major bull markets end with an upside spike. And it’s no wonder that crashes are so massive in their destruction. Investors are all-in just prior to the crash.
The astonishing fact is that such a large percentage of investors believe the “going to the moon” story, and that a crash takes out the vast majority of them. Like Nigel Tufnel, their desire to believe that, “these go up to eleven” overrides what should be their common sense and reason that, in fact, there is no real eleven; there is no ride to the moon.
Does this mean that investment is inherently a “dog’s breakfast” and that you should avoid it? Not at all.
But rather than “chasing the trends,” which more often than not end in heartbreak, a very simple philosophy toward investment can prove quite successful.
Be prepared to do your homework. Seek out investments that you feel have real promise, but, as yet, are not popular and are therefore priced very low. (Warning: this can at times be quite a lot of work, as you’ll reject the great majority of investments you investigate.)
Buy low, when conventional wisdom says that the investment in question is going nowhere. (If you find that you’d missed a sleeper and it’s now shooting upward, be prepared to let it pass you by—there are other sleepers that you can still buy low.)
Take profits off the table at intervals. If for any reason you don’t get out in time, you’ll want to have regained your original capital outlay.
Get out when it becomes clear that everybody and his dog is buying the investment. (Don’t try to guess the crash date. It’s virtually impossible to squeeze out the last dollar before a crash, and sell at precisely the right moment.)
Don’t regret getting out a year (or more) early. You have your wealth intact and are poised to get back in when the crash has bottomed. (In this regard, you’ll be in a small group, which will make your position that much stronger when it’s time to reinvest.)
It should be said that there are those rare investments that enjoy a meteoric rise, and they’re just as prevalent now as in other eras; however, even those investments are subject to the same natural laws of economics. They, too, tend to get oversold at some point and when they do—when the brokers and television pundits are saying that they are now headed to the moon—that’s the moment at which you might wish to remind yourself that “there’s no eleven,” and sell.
Tags: economic collapse,